African Lions: Trends in Ethiopia’s dynamic labor market

Ethiopia—the second-most populous country in sub-Saharan Africa— has had one of the fastest-growing economies in the world, averaging 11 percent growth between 2005-2011. Its unemployment rate is dropping—from 8.2 percent in 1999 to 5.4 percent in 2013. Urban areas, where unemployment is more prevalent, have experienced a drop from 26.1 percent to 21.0 percent over the same time period. Similarly, the number of people employed in the informal sector has dropped by about half both for men and women (from 38.9 to 18.1 percent and 64.8 to 36.5 percent, respectively). Despite these gains, questions exist regarding whether these successes are inclusive and sustainable.

Author

Assistant Director - Africa Growth Initiative

In their paper, “Ethiopia—an agrarian economy in transition,” Yared Seid, Alemayehu Seyoum Taffesse, and Seid Nuru Ali explore recent trends in Ethiopian economic growth, structural transformation, and labor outcomes to assess Ethiopia’s progress towards a more modern economy. Specifically, they examine effects of government policies around infrastructure investment, education, social protection, accumulation of capital, and structural transformation on economic growth and employment generation. The authors find that Ethiopia is seeing some major shifts in its employment trends, as outlined below. (See here for the full working paper and a more in-depth discussion of these policies and outcomes.)

Increased investments in human capital and changes in the labor market mark inclusive growth in Ethiopia

Ethiopia’s development plans in recent years have put heavy emphasis on education, and the country has actually come close to achieving its goal of universal primary education. Quantity is not quality though: As the authors point out, many critics complain that the rapid expansion might have “compromised” the educational quality of Ethiopian primary schools.

At the same time, university enrollment has increased from 10,000 in 1990 to 360,000 in 2015. The country has also invested heavily in technical and vocational training (TVET)—with the aim of producing “semi-skilled and relatively well-suited workers to the growing manufacturing and construction sectors”—increasing the number of TVET students from 5264 in 1999 to 271,389 in 2014. But again, quality seems to be a challenge: Unfortunately, these programs still struggle to meet the skills needs of the market, say the authors. Often their students do not meet the standards of potential employers or fit the types of jobs employers are looking to fill.

Education is not the only realm in which inclusive growth can be seen: Since 1999, the overall labor force participation rate in Ethiopia has increased, which the authors attribute to increased participation of women in the workforce—which experienced a jump of 6 percentage points by 2013 (from 71.9 to 77.8 percent). More specifically, they note the increase mostly came from increased participation of rural women, as female participation rates in urban areas stagnated during that same time period. Specifically, the increase in female labor has mostly been in health, education, and social work sectors.

Unemployment trends and skills mismatch

Despite these successes, obstacles continue to lay in the way of sustaining inclusive growth. The World Bank estimates that about 600,000 individuals enter the Ethiopian labor force every year. However, according to the authors, the economy is not generating enough jobs for this large number, especially with the large number of young people entering the market in coming years due to the youth bulge. Thus, they state that this “imbalance between the increase in the supply of and demand for workers” is creating increasing and long-lasting unemployment for Ethiopian youth. In addition, the deficiencies in the primary school system and TVET prevent employers from finding the workers adequately trained for the demanded tasks.

Rising unemployment is especially true for new college graduates (of which there are an increasing number). The authors state, “Anecdotal evidence suggests that a large increase in the number of college graduates following the expansion of tertiary education in recent years partly explains the high unemployment rate and long unemployment duration among new college graduates.”

Structural transformation in Ethiopia: Movement out of agriculture and towards services

Like many African countries, Ethiopia’s attempts to grow manufacturing for successful structural transformation have not yet borne fruit: Rather, labor is moving from agriculture to the services sector (and only somewhat into industry). As seen in Table 1, the share of labor in the agriculture sector declined by 7.5 percentage points between 2005-2013 and manufacturing (a subsector of industry) declined by 0.4 percentage points, while the service sector’s share increased by 5.8 percentage points. The authors posit a number of reasons for manufacturing’s dropping share, including poor infrastructure, higher inherent risks for investors and banks, lower initial rates of return to investment compared to services, and a weak link with agriculture (requiring imports of raw materials).

As seen in Figure 1, the subsector of construction has experienced the highest employment growth—11 percent—between 1990 and 2011. However, the authors note its contribution to productivity remained relatively low compared to the sector’s growth performance in employment. The authors attribute this trend to large public infrastructure projects in the country, such as the Grand Ethiopian Renaissance Dam. Like in construction, the authors find financial services, mining, and manufacturing sectors experienced higher employment growth than growth in output, while agriculture, utilities, and transport experienced less growth in employment but higher value-added growth. Notably, employment in the public sector (“government services”) decreased too, by about 7 percentage points from just 2003, suggesting that job growth has been in the private sector.

In response to these trends, the Ethiopian government, as part of its Growth and Transformation Plan II, maintains a focus on both rapid industrialization and structural transformation. While some gains in industry have been positive—especially in the construction sector in anticipation of a growing manufacturing center—the authors note that the more productive manufacturing sector has not grown enough to contribute to sustainable growth.

Recommendations

As Ethiopia continues implementing the second phase of its national development plan—the Growth and Transformation Plan (GTP)—the authors offer the following recommendations:

Education and TVET: The authors recommend better conduits of information about jobs for university and TVET students, such as job fairs and career placement offices to help students initiate their job searches. Similarly, they say that TVET institutions should look to partner with industries for cooperative training programs or apprenticeships.

Job creation and urban safety net programs: As Ethiopia continues to create jobs for its incoming youth laborers, it should also consider “government-sponsored urban safety net program,” in order to prevent many of the challenges that come with high youth unemployment rate. Similarly, the authors call for “policies promoting savings, investment, and job creation for the country to enjoy the demographic dividend in full.”

Targeted structural transformation: The authors recommend that policymakers continue to emphasize “more productive sectors such as new niches in the agriculture sector and targeted manufacturing industries” in order to maintain the momentum of the country’s growth.

Enabling infrastructure and trade for industrial development: As the GTP places manufacturing at the center of Ethiopia’s growth strategy, the authors recommend that the country continue to invest in infrastructure to “support industrial enhancements,” as well as “encourage […] the private sector to diversify activities from localized services to manufacturing.”

Note: The African Lions project is a collaboration among United Nations University-World Institute for Development Economics Research (UNU-WIDER), the University of Cape Town’s Development Policy Research Unit (DPRU), and the Brookings Africa Growth Initiative, that provides an analytical basis for policy recommendations and value-added guidance to domestic policymakers in the fast-growing economies of Africa, as well as for the broader global community interested in the development of the region. The six papers, covering Mozambique, Kenya, Ghana, South Africa, Ethiopia, and Nigeria, explore the key constraints facing African economies as they attempt to maintain a long-run economic growth and development trajectory.